Speech by ADB President Haruhiko Kuroda on 15 November 2012 at the Foreign Correspondents' Club, Hong Kong, China. See FCC website.

Introduction

Good afternoon, ladies and gentlemen.

I am very pleased to be here with you today. I would like to thank the Foreign Correspondents' Club for extending the invitation to speak to you about inclusive growth in Asia and the Pacific.

In considering my remarks, I felt it important to expand the topic somewhat to also touch on a few other issues – namely, the current economic outlook and the growth modality which is expected in the region. I call it inclusive, green and knowledge-led growth.

Let me begin with the economic outlook.

Economic Prospects

As you know, Asia has enjoyed several consecutive decades of high growth. Following the recent upheavals in the global economy, Asia appears to have taken the reins, and is now driving global growth.

However, Asia is not immune to the ongoing effects of the slowdown in the US or the ongoing sovereign debt crises in the eurozone.

In fact, the global slump in demand for Asian exports has already placed a serious drag on the region's major economies. Our Asian Development Outlook Update, issued in October, lowered 2012 GDP growth forecast for China to 7.7% from the April projection of 8.5%.

India – another of developing Asia's economic giants – has also had its growth forecast lowered. In India's case, the main issues are weak investment, low agricultural growth, ongoing fuel shortages and infrastructure bottlenecks. While our April forecast indicated growth of 7.0% for fiscal year 2012, the October Update is forecasting only 5.6%. East Asia's other export-oriented economies, especially ASEAN economies, remain resilient this year, but it is not certain whether immunity to global sluggishness and the slowdown in the region's two largest economies will last.

Clearly, these factors affect the overall growth of the region. We now see developing Asia and the Pacific growing at 6.1% in 2012 and 6.7% in 2013 – a significant drop from the 7.2% growth we saw in 2011.

Fortunately, most economies in the region have ample room to use monetary and fiscal tools to smooth out these external and internal shocks. But in a heterogeneous region like Asia, policy responses must reflect the varying macroeconomic conditions of each individual economy. Countries with sufficient fiscal space and low inflation rates should rely on expansionary policies if growth weakens significantly below projections.

At rates that are above 6%, Asia's growth prospects are still relatively healthy.

What regional authorities have to do is to fine tune the slowdown, but use the weak external environment as an opportunity to undertake structural reform to maintain developing Asia's growth momentum.

Balanced Growth

Over the past two decades, the region earned the label “Factory Asia” because it sourced intermediate goods and parts from within Asia to assemble final goods for export to affluent markets. This propelled high growth in developing Asia and significantly reduced the number of people living in poverty. However, the protracted global slowdown has highlighted the fact that pursuing high growth through a heavy reliance on exports is no longer sustainable.

With weakness in major industrial countries and decelerating growth in the region's two giants, the future growth environment is less favorable. Economies in the region must therefore adapt by speeding up the rebalancing process, improving productivity, and enhancing efficiency.

Rebalancing efforts should also be used as an opportunity to promote inclusive and environmentally sustainable growth. Rapid economic expansion in the last two decades lifted millions out of poverty, but this has been accompanied by rising inequality and serious environmental damage. Such a pattern of growth can no longer continue. By increasing expenditures in education, health, and social safety nets, governments can promote inclusive growth while fostering continued economic expansion.

Developing a vibrant service sector in the region is an important way to supplement growth. The role of services is expected to expand as the region's economies undergo structural change. If developing Asia follows the same path travelled by advanced economies, agriculture's dominance will give way to industry, and industry will then be supplanted by services. As manufacturing wages rise and its labor intensity falls, Asia will need to look more to services to create jobs for the millions who join the workforce every year.

There is certainly room for the service sector to grow: the share of industry in developing Asia's output surpassed that of the OECD in 2010, at 41% versus 24%, but the share of services still lags by a wide margin. In developing Asia, the share of services is 48%, while in OECD countries it is 75%.

A more dynamic service sector is key to future growth. In developing Asia, the sector is still dominated by traditional services, such as restaurants and personal services like taxi drivers or barbers. Modern services, such as Internet connectivity technology and financial, legal, and other professional business services, occupy less than 10% of Asia's service economy. This is well below the 20%–25% in advanced economies.

A vibrant service sector could have broad economic benefits. Synergies between services and industry could improve overall productivity. For instance, industrial design, marketing, and legal services can facilitate investment and development of new manufactured products. The service sector also tends to be more effective in creating jobs, particularly for women, thus supporting inclusive growth. Developing the service sector can also diversify the production base, which will enhance the resilience of the economy and boost its growth momentum.

But what is hindering service sector dynamism in Asia? Skill gaps and a lack of infrastructure are frequently cited, but burdensome regulations are the biggest barrier. Upgrading the service sector is low-hanging fruit for Asia, because no tremendous investments are required. Yet excessive regulation persists. Regulations that protect incumbent firms and other vested interests keep Asian markets less competitive and undermine productivity and efficiency.

Inclusive, Green and Knowledge-led Growth

This leads me to my main topic – inclusive growth. There is no doubt that Asia's rapid growth has contributed to remarkable poverty reduction. However, growth has been uneven, favoring coastal areas over interiors and cities over rural areas, and skilled labor and owners of capital over those with lesser skills and no capital. The result has been large and persistent pockets of income and non-income poverty and rising inequality, including in the fastest growing Asian economies.

As of 2008, about 830 million people in developing Asia were still living below the $1.25/day poverty line in terms of purchasing power parity. In 2010, 368 million Asian people still had no access to a clean, reliable source of drinking water; nearly 1.7 billion lacked access to proper sanitation. An estimated 83 million Asian children under 5 years of age are underweight and, each year, about 3 million will die before reaching their fifth birthday. These chilling statistics, set against the conspicuously growing wealth of many Asian countries, illustrate what see as the “two faces of Asia.”

Since the early 1990s, the Gini coefficient – a common measure of inequality – has risen in many Asian countries, including China, India and Indonesia – Asia's most populous countries and drivers of the region's rapid growth.

At the same time, global warming and climate change are significant global risks that will affect large numbers of Asian people, especially vulnerable people. Developing Asia already accounts for a third of total global emissions. Mitigation and adaptation measures are urgently needed in the region.

We have seen the center of economic gravity gradually shifting to Asia, and the challenges we face are huge. Asia's role in sustaining global growth is critical – and this will best be achieved by ensuring Asia's own strong growth continues. To do this, growth must be more inclusive, green, and knowledge-led. There are five core elements to this.

First, more productive jobs are needed to keep growth resilient. Studies show an estimated 420 million Asians will enter the labor market by 2030. So creating decent employment opportunities remains a daunting challenge.

Infrastructure development is essential to better logistics, stimulate the economy, and create jobs. Better infrastructure narrows the rural-urban divide, and allows social programs—like education and health care—to reach the most vulnerable. Innovative approaches, including public-private partnerships, are critical to meet this massive investment challenge.

Second, we must broaden human capital through new opportunities that help expand the middle class and rebalance sources of growth more toward domestic and regional demand—as greater inclusiveness widens the consumer base.

Third is providing effective social safety nets to mitigate risks and vulnerabilities caused by sickness, economic crises, industrial restructuring, or natural disasters.

Fourth is to finance investments that both mitigate and adapt to climate change. Asia is prone to extreme weather and catastrophic disasters. There are huge opportunities for profitable investments in green growth and disaster preparedness.

And fifth is enhanced regional cooperation and integration. Broader openness within the region will increase economic resilience and promote sustained, more inclusive development. Freer trade and greater macroeconomic cooperation will enhance efficiency, strengthen stability and sustain growth. Fifteen years after the start of the ADB-supported Greater Mekong Subregion, or GMS, program, we have seen a largely barren intraregional road system become a lattice-work of integrated transport corridors—evolving into full-fledged economic corridors. We hope reforms underway in Myanmar will pave the way for further regional integration. ADB is fully behind these efforts.

Of course, it goes without saying that good governance is critical to provide strong underpinnings for inclusive growth. Poor governance, weak institutions, and systemic corruption pose significant risks to public sector service delivery and inclusive, sustainable development. Countries across Asia and the Pacific are making concerted efforts to improve governance, but more must be done to promote inclusion, political stability and investment. It is increasingly important that governments and institutions build their capacity to deliver inclusive growth, thereby ensuring that the benefits of growth are much more widely shared.

Concluding Remarks

In closing, I would like to reiterate that the continued weakness in the international economic environment provides a unique opportunity for developing Asia to undertake structural reforms for inclusive and sustainable growth. The challenge is great, but the potential for gains is undeniable. I firmly believe that Asia is ready to take on this challenge, and the benefits will be felt for generations to come.

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